ABSTRACT
This chapter examines the principles surrounding the separation of costs into fixed and variable, and how this concept can be used for improved decision making, particularly from the buyers perspective. If one more unit is manufactured, the total costs of the organisation rise but only some of those costs. These costs which rise are the marginal or variable costs. Contribution is a key term in marginal costing, being the difference between the sales value and the variable costs of the product. An income statement may be drawn up for a company and then converted into a contribution statement. Break-even Chart shows the point where sales are equal to total costs. The total costs line is the sum of the variable costs and the fixed costs and is parallel to the variable costs line. The break-even chart serves to demonstrate cost behaviour and therefore shows the level of output at which a company attains profitability.
